Firm to appeal penny-stock ban

Tuesday, Sept. 16, 1997 | 11:37 a.m.

A San Diego-based investment brokerage with an office in Las Vegas will appeal an order that permanently bars the company from selling penny stocks.

An attorney for La Jolla Capital Corp. said the company has agreed not to sell those issues even though the sanctions are not effective during a formal appeal.

The Los Angeles District Business Conduct Committee of the National Association of Securities Dealers Regulation Inc. said that La Jolla Capital, which employs 140 brokers in 11 offices in six states, circumvented penny stock rules.

Penny stocks are unlisted securities that trade over the counter and are priced at less than $5 a share.

The DBCC panel, a group of elected representatives in the securities industry, said La Jolla evaded Securities and Exchange Commission rules on risk disclosure, coercing investors to sign a misleading document or, in some cases, forging signatures.

The company and its president, Harold Gallison, were fined more than $400,000 and are responsible for repaying more than 100 investors in 26 states about $400,000. Four other senior officials based in San Diego were fined a total of more than $150,000.

"I don't know what else we could have done" to comply with stock rules, said Irving Einhorn, a Los Angeles attorney representing La Jolla. "Any firm that reads this decision should get out of the penny-stock business."

Einhorn said the company made a good-faith effort to explain risk disclosure in statements to clients, asking customers to sign the form acknowledging receipt. The DBCC said the documents were portrayed to investors as "a formality," but were in fact an attempt to circumvent penny stock rule requirements.

Einhorn acknowledged that some La Jolla brokers forged customer signatures and that those brokers are no longer with the firm. Einhorn said spot checks by regulators turned up about six or seven forgeries.

The violations occurred at La Jolla offices in San Diego; New York; Bethesda, Md.; Modesto, Calif.; and Las Vegas. Regulatory officials could not determine how many of the violations occurred in Las Vegas or how many Southern Nevada clients may have been affected.

The 50-page complaint does not break incidents down by office. Calls to the Las Vegas office were not returned.

The NASD said the 15 securities involved and sold by La Jolla were: Affordable Housing Constructors Inc.; Ambra Royalty, Inc.; Drucker Industries Inc.; Environmental Recovery Systems Inc.; Exten Industries Inc.; HEARx Ltd.; InfoServe Inc.; Interactive Telesis Inc. (formerly known as INN Investment News Network Ltd.); Largo Vista Group Ltd.; Longport Inc.; Modern Records Inc.; Peppermint Park Productions Inc.; Photo Acoustic Technology Inc.; Quadratech Inc.; and XO Corp. The companies themselves have not been accused in the NASD action.